Navigating Healthcare Costs In Retirement

Healthcare costs are a concern for nearly everyone, and that is particularly the case for those approaching retirement. The amount of healthcare needed typically increases as we age, and Medicare differs a good deal from the private insurance most of us use during our working years. Determining these costs is an important component of your retirement budget.

Fidelity conducts an annual survey of healthcare costs, and for the most recent year, they estimated that a 65-year-old couple would spend an average of $240,000 on healthcare in retirement. This figure includes insurance premiums and other out of pocket costs like deductibles and co-insurance, but doesn’t include other potentially big ticket items like dental or long term care. And while it is helpful to keep in mind average costs, when you’re coming up with your own budget, it’s more helpful to dig into the details.

The foundation of healthcare coverage for most in retirement is Medicare which is split into parts A, B, C and D and details on each are as follows:

Medicare Part A - Medicare Part A covers in-patient hospital care, hospice care and on a limited basis, home healthcare services ordered by your doctor. If you paid into the social security system for a a minimum of 10 years, there is no charge for Medicare Part A.

Medicare Part B - Medicare Part B covers medically-necessary services, which includes doctor visits, physical therapy, home health services and other outpatient care. It also covers some preventive services. The list of what’s included under this category was expanded with the recently passed healthcare bill.

There is a charge for Medicare Part B, and it is typically deducted from your social security check. How much you pay depends upon your income in retirement. In 2012, the monthly amount ranged from $99.90 to $319.70.

Medicare Part C - Part C covers privately administered Medicare plans typically known as Medicare Advantage plans. Most retirees participate in traditional Medicare as opposed to Medicare Advantage, so we’ll forego covering those plans in this post.

Medicare Part D - Part D covers prescription drugs, and is the most recent addition to Medicare, having been established in the last decade. For those on original Medicare, Part D is an addition that is administered by private insurers and differs in terms of what medications are covered as well as which pharmacies participate.

In addition to the premiums, deductibles and co-pays one expects with insurance coverage, Part D also has what’s popularly known as a “donut-hole,” in which the participant pays for the entire cost of any prescriptions purchased. This begins when prescription drug spending reaches $2930, and continues until expenses exceed $4700. The Affordable Care Act passed in 2010 included provisions to shrink the size of the donut hole over time, closing it altogether by 2020. Obviously, from the perspective of plan participants, this will result in significant cost savings.

Needless to say, Part D is complex and warrants its own post in the next few weeks, and we’ll also cover Medigap plans, which are supplemental policies that cover costs not covered by traditional Medicare. For now, if we break down the cost of Medicare Part A and B with no additional coverage from Medigap policies, here are the relevant items:

Part A - No cost for most participants

Part B - Premiums range from $99.90 to $319.70

Deductibles/Copays - There are deductibles and copays with Medicare just as there are with private insurance. The amounts depend upon the type of service in question, and many of these fees can be defrayed by a Medigap policy. More information on fees the plan participant can expect to incur are available at the government Medicare website here.

In the next post, I’ll examine Part D, prescription drug coverage and in the final post in this series, I’ll cover Medigap policies and how they can supplement parts B & D.

I am President and CEO of Minerva Planning Group based in Atlanta, GA. I'm a CFA charterholder and a CERTIFIED FINANCIAL PLANNER™ practitioner. I began work at Minerva in 2003 with extensive experience in business planning and corporate finance. I enjoy working with individ...

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